He is 42years old Doctor of Economics, Managing Partner of “Capital Times”. The author of four books, including the bestseller “Small Encyclopedia of trader” (1997) and “The Road to Financial Freedom” (2004), “Master Trading” (2002), “The trader- investor” (2000). According to the newspaper “Business” in 1998, 1999 and 2004 he was among the five most influential individuals in the stock market of Ukraine. He has many years experience in the stock market, FOREX, stock futures, OTC options trading. He has developed a model of super-exponentional distribution to measure the risk in financial markets, that reflects what is happening in the markets more accurately than the normal Gaussian distribution. Also he developed an index of investment prices (investment inflation), which is the best alternative of well-known consumer inflation for investors’ purposes.
“Many mysteries of the economy have a simple human explanation”
– Eric Leontievich, why you, the financier and trader, are interested in demographic trends?
– To prediction markets is a part of my profession. And demography is precisely the factor that has a very clear effect on the economy, giving in long-term forecasting. For example, when the city’s population is growing rapidly, we can easily calculate the necessary volume of housing and infrastructure construction, growth of furniture, household appliances, food products markets, as well as job market. Similarly, it is clear that the city’s occupied predominantly with wealthy retirees will be able to develop well only the service sector for those retirees. If we move from the level of the city to the global one, we’ll see clearly that most of the “frightening”, “amazing”, “strange” economic processes of our time are caused by the fact that mankind is at the first time in its history experience a key period of its existence. It is the transition from phase of accelerating growth towards stabilization. This has already happened in Japan, most Western European countries, Russia, Ukraine and Belarus. Before our eyes, the growth of population stops in China. In physics, such process is called a phase transition, when at some point in the relatively slow heating of water is suddenly almost instantly becomes steam, and while cooling – ice. A similar “phase transition” took place in human society only in hundred past years, when suddenly the world’s population has quadrupled, and then the phase of explosive growth so suddenly is replaced by a phase of stabilization.
WORLD POPULATION FROM 2000 BC TO 3000 AD
Source: Sergei Kapitsa’s data.
1 – DATA OF BIRABEN,
2 – BLOW-UP,
3 – DEMOGRAPHIC TRANSITION,
4 – STABILIZED POPULATION,
5 – ANCIENT WORLD,
6 – MIDDLE AGES,
7 – MODERNITY,
8 – RECENT HISTORY,
↑ – THE PLAGUE 1348
From the global economy to local markets
– Do you see links between demographic transition and the global economic crisis?
– The majority of older Americans regarded their homes as a major asset to secure old age. Only in 2007, just before the crisis, two of the three U.S. residents aged 55 to 64 years had an outstanding mortgage debt $ 85 thousand average. Worse, by 2011, after falling house prices, 22% owners of residential property, baby boomers as a rule, need for mortgage loans more than their homes prices.
A weak property market, as for the price level so for the sale ability, may stay as such for a long time. Generally, while demographic transition the bet on real estate can be a cruel joke, because mostly the young people mainly demand new homes and apartments. And since January 2011 more than 10 thousands of American baby boomers have begun to reach age 65 on a daily basis. And it will be continued not a couple of years, but until 2030.
The stock market was also not favorable to older Americans. At the beginning of 2011, 42% of working people in the U.S. have pension plans 401 (k), invested in equities. However, the past decade was unprofitable – in the period from 2000 to 2010, the U.S. stock indexes rose by a few symbolic percents, even less than the consumer inflation.
We should also mention the growing old age health care costs. So, in 2010, it was estimated that the average American male at the age of 55 years should have about $ 187,000 to cover future expenditure on medicines and treatment. 65-year-old American woman should have even more, about $ 213 thousand, because her life expectancy is longer than man’s one.
So, millions of baby boomers in the U.S are going to meet their old age in such environment of depreciation of investment pension assets and the growing medical burden. Of course, this will have a multifaceted impact on the U.S. financial markets and whole economy.
– How will the demographic transition affect the world economy in the near and distant future?
– The most important macroeconomic consequence of the demographic transition will be the changing balance between the number of young and older people in favor of the latter. This involves the rise of the pension burden on workers. Unfortunately, the economy and especially the state budgets and social programs in most countries are not ready for such changes. Many decades of rapid population growth have developed the habit of politicians to borrow more capital in hoping that future taxpayers will return all the debts and even with interest because their number will grew. While demographic transition a significant deterioration of state finances conditions is inevitable, and it will be met either by increasing the tax burden, large-scale debt financing or with the hyper-inflationary shock due to an unsecured future growth of money issue. We are already seeing the start of this process in the United States. A couple of decades before it went to Japan, which was one of the first from developed countries which had faced a demographic transition. Only the presence of developing countries is still holding back the launch of hyperinflation – there is a place here to dissipate the unsecured currency issue. However, China also has begun a demographic transition, as it also entered the stage of stabilization of the population.
– Which regions will continue to grow?
– It is projected that between 2010 and 2050 Africa’s population will grow by 1 billion people, while India and Pakistan both will give almost 0.6 billion people. Only these two regions provide an increase about 70% of total population’s growth on the planet. What may be interesting in this forecast except that it will come true for certain? First, these countries and regions will additionally demand for cheap mass production as foods (and that will encourage the flowering of low quality, but large-scale agricultural production, including, for example, in Ukraine), soaps and detergents (this will be profitable for such companies as Johnson & Johnson, Procter & Gamble, etc.). Second, we will see new waves of emigration of cheap labor. Also there are always appear those who have a lot of money among the one billion people, on average they are one percent of the total population of the country. And these new millionaires will be tourists and luxury goods consumers. Finally, the excellent prospects will be opened to investors, who will earn as on direct investments in the fast-growing economies, and indirectly, for example, buying shares in companies that earn in these countries.
– What do you think about the impact of the demographic transition on selected goods and services markets?
– The need for new housing, furniture, plumbing fixtures, etc decrease is inevitable. It is because the needs of young and elder vary greatly. The demands on the quality of education of relatively small number of young men and on medical service of a large number of elder ones will increase at one and the same time. But older persons travel more, and it should impact positively on tourism and air transport.
– Do you consider whether the widespread introduction of robots in the production of goods and services save us from the problems associated with aging population?
– Japan was among the first who had faced the negative effects of demographic transition. Therefore, they are seriously engaged in the development of robotics: the news on this topic come almost every day from the Land of the Rising Sun. But the total and universal application of robots in production is a very distant future. The demographic transition is far from ending in Asia and Africa. So, cheap labor will be long enough on the planet.
Three scenarios for the global financial system
– Can the demographic transition lead to changes in world finances?
– Jump proportion of elderly people affects the world of finance and investment in a special way. Pensioners prefer low-risk investments with guaranteed interest payments: deposits, bonds, annuities, etc. In turn the excess supply of money in interest bearing assets – while reducing consumer price inflation to zero values – may lead to lower interest rates on deposits and bonds, as happened in the late 1990s in Japan. This may be a background to the fact that after ending of demographic transition, the world will return to the “gold” standard, with its zero inflation and one percent investment inflation.
– Are other scenarios possible?
Source: United Nations.
– Classic example of demographic transition in developed countries is a Sweden. Here we see very high taxes, the highest standard of living and a stable political system, which is built on a foundation of well secured elderly Swedes. At the same time Sweden had to control emigration for low-wage service specialties. I think other developed European countries will go in this direction in the next one to two decades. Governments can respond to the deterioration of public finances with increased tax burden and even with the unsecured money supply in the extreme situation. The last scenario is a scenario of the public finances’ collapse and every country will try to avoid it. So we may for the present evaluate it as a very improbable. Most analysts now expect that after all the world goes into a state of high taxes in Swedish, low interest rates in Japanese and consistently high quality of life in German.
– What could prevent this?
– When the demographic transition will begin in the developing countries hyperinflationary shock will be very probable because the possibility to export inflation in developing countries will disappear. The same Japan could avoid inflation despite the active growth in public debt only due to withdrawal and investment of excess money to foreign markets, first in the U.S., and then more widely. Could it be that it will be a lot of the money, but not enough objects of investment? Yes, everything goes in such a way. It will certainly provoke the hyperinflationary shock and subsequent reboot, and the reformation of the global financial system with the emergence of new global reserve currency.
Tips for investors, “top” and a simple managers
– What strategies should follow the investors and owners of companies in above mentioned historical perspective?– Stable reduction of consumer demand in the Slavic countries, supposes a more active search for the application of capital in foreign markets. There is still a great shortage of ordinary goods and services in our countries at the present time. But sooner or later it will be exhausted; the opportunities for growth due to meet domestic demand will disappear. The highest increase in the next 20-30 years will be possible for the companies, focused on meeting the growing demand of the poorest countries of Southeast Asia and Africa, the middle class in China, as well as the aging population in Western Europe. As for the managers and owners of companies, they must understand that one can not be fenced out of the larger world in his local little world. Even if you do business only in your country global competition and the change of the internal demography will all the same inevitably influence your business more and more.
– How to build the career to novice manager, business school graduate under the demographic transition conditions?
– Many “school” true proved to be false, and the world is changing faster and faster. Therefore, the old cases and knowledge can become obsolete faster than the graduate make aware of this. We should actively explore Asian culture, doing business features in Africa, the needs of older Europeans. Requirements for personnel, their knowledge and productivity will only grow in our countries in the future, and everybody will have to work for per him and per one who was not born. Do not think that the process of changing the world under the influence of the demographic transition could last for decades. Changes are already happening, and we ourselves are citizens of a changing world.